Hastings Law Journal

Volume 20 | Issue 1 Article 7

1-1968

Crossed Checks, Account Payee, and Non-Negotiable Checks: Some Suggestions fromForeign LawDaniel E. Murray

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Recommended CitationDaniel E. Murray, Crossed Checks, Account Payee, and Non-Negotiable Checks: Some Suggestions from Foreign Law, 20 Hastings L.J. 273(1968).Available at: https://repository.uchastings.edu/hastings_law_journal/vol20/iss1/7

Crossed Checks, Account Payee, AndNon-Negotiable Checks: Some

Suggestions From Foreign Law

By DAmNL E. MuiiAY*

Introduction

AM ERICAN codifications have, in general, treated the law govern-ing checks as a mere subdivision of the law governing drafts or billsof exchange without perceiving that these instruments, althoughrelated, actually perform different functions.' The draft or bill ofexchange is a credit instrument payable at sight, or more commonly,after a certain specified period. A check, on the other hand, is usednormally to pay for goods and services and is designed basically forpayment and not credit.2 The drawer and drawee of a draft (bill ofexchange) normally anticipate that this instrument will be negoti-ated to a bank which is financing the sale of goods in domestic orinternational commerce, and that this bank will indorse it to otherbanks or financing agencies for collection. In this situation, the vari-ous banks or financial institutions should be protected from mostdefenses which may arise between the vendor and vendee bymeans of the negotiability concept. The vendor-drawer and thevendee-drawee use the draft with full cognizance of the risks in-volved because it is the only practical way of handling the creditsale and purchase of goods.

The drawer of a check, on the other hand, is not entering into acredit transaction for his own benefit, but rather is concernedabout paying a current bill, whether for goods or services. If adrawer-debtor desired a credit arrangement, he would give the credi-

*Professor of Law, University of Miami.1 UN FoR CommEcI AL CODE § 3-104 [hereinafter cited as U.C.C.];

UNIFoRmI NEGOTIABLE INsTRUmENTS ACT § 185 [hereinafter cited as N.I.L.].The English Bills of Exchange Act of 1882, 45 & 46 Vict., c. 61, § 73 [herein-after cited as B.E.A.], was the model for N.I.L. § 185. The effect of section73 of the English Act has been limited by the special rules for checks of sec-tion 60 of the same Act and also by the crossed check legislation discussedin text accompanying notes 12-27 infra.

2 J. BouTE ON, LE CHEQUE 117-38 (1924); T. AscAPmLi, DEREcHo MER-cENTI 568 et. seq. (1940).

[273]

tor a promissory note or some other credit instrument. The drawerof a check normally does not anticipate, that his payee will indorsethe check to a holder, who may in turn indorse it to another holder,thereby placing the instrument in the flow of commerce. Most checks,with the possible 'exception of payroll checks, will be deposited forcollection by the payee in his own bank, which will directly or indi-rectly make collection from the drawee bank. The payee may, ofcourse, abbreviate this collection process by presenting the check di-rectly to the drawee bank and securing payment. The payee alsomay indorse it to a merchant or proprietor and receive full payment.

It would seem that many persons would cash their payroll checkswith local retail concerns. In such cases the merchant would beprotected against many of the defenses to payment of the instru-ment that exist between the immediate parties to the transactionbecause' of negotiability principles. The increasing use of checkingaccounts by white and blue-collar workers, however, should diminishthis use of the negotiability concept with respect to checks.

Problems Caused by Application of Negotiability Principles to Checks

The negotiability concept originated with the law merchant 3 as ameans of making the bill and the note efficient commercial substitutesfor.money.4 Under this concept, the bill or the note is unfettered bycontractual defenses existing between the immediate parties to theinstrument once it reaches the hands of a holder in due course.Negotiability facilitates the transfer of such instruments, which areissued primarily for credit.

The check, however, as noted above, is basically a payment andnot a credit instrument. The present application of negotiability prin-ciples to checks permits, if not encourages, the following misuses of,the check:

(1) A fraudulent vendor sells goods to a defrauded vendee. Thevendee gives a check to the vendor, who indorses to a holderin due course, and the latter recovers from the drawer-ven-dee. The vendor is insolvent or has vanished, and all lossfalls on the vendee.5

(2) A dishonest employee supplies his employer with the namesof real or fictitious creditors. The employer signs checkspayable to these "creditors," and the employee then indorses

3 See W. BRITTON, HANDBOOK OF THE LAW OF B sL s AND NoTEs 1-7, 16(2d ed. 1961); Burdick, What Is The Law Merchant?, 2 COLu1Vm. L. REV. 470(1902).

4 As to the present applicability of negotiability principles, see generallyJ.B. SMITH, 2 CALIFORNTA COMMERCIAL LAw § 1.1 (Cal. Cont. Educ. Bar. 1964).

5 U.C.C. §§ 3-302 to -305. :%

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these checks to a confederate, who indorses them to a holderin due course or makes collection directly at the draweebank. All loss falls on the employer.6

(3) An imposter induces the drawer to issue a check to him inthe name of the person impersonated. The imposter thenindorses the check to a confederate, who indorses to a holderor makes direct presentation to the drawee. Again, all lossfalls on the drawer.7

(4) The drawer gives a check to a payee-creditor. The payeeindorses to a holder who alters the check by increasing theamount and then indorses to a holder in due course. Theholder in due course may recover the original amount ofthe check, and he will suffer a loss, which is computed to bethe difference between the original amount of the check andthe amount he paid for it. If the negligence of the drawersubstantially contributed to the alteration, the drawer willbe precluded from asserting the alteration against theholder in due course or against his own drawee bank whichpaid the check in accordance with reasonable commercialstandards. From the perspective of either the drawer or theholder in due course, these are not happy alternatives.8

(5) A drawer-debtor mails a check to the payee. The check isstolen from the mails, or from the payee after it is received.The thief forges the name of the payee and indorses it to agood faith holder. The good faith holder indorses for collec-tion to his bank which collects from the drawee. This "sim-ple" transaction results in the drawee having a cause of ac-tion against the collecting bank. In addition, of course, thecollecting bank can recover from the good faith holder. Thetrue payee also may sue the collecting bank, or he may suethe drawee bank. The payee also may sue the drawer onthe unpaid underlying obligation for which the check wasissued. The drawer, finally, may need to sue the draweebank to force it to recredit his account. This "simple"transaction may result in six possible lawsuits, none of whichwould have been necessary had the drawer paid his debtin cash.9

It is evident that if the drawer in examples (2), (4) and (5) haddelivered cash to his creditor, he would not have suffered any loss.In these situations, the check is inferior to cash. Of course, the

6 U.C.C. §§ 3-405 (1) (b) to -405(1) (c).7 U.C.C. § 3-405(1) (a).s U.C.C. §§ 3-407, -406, 4-401.9 U.C.C. §§ 3-304, -414, -419, 4-207, -401, -407.

November 1968] NON-NEGOTIABLE CHECKS

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possession of cash would entail the risk of possible theft or robberyfrom the drawer, and the use of checks eliminates this risk as wellas the risk of loss. Insofar as examples (1) and (3) are concerned, ifthere were some way to prevent the "easy" negotiation of the checksby the payees, many embezzlements and frauds would be prevented.The prevention of easy negotiation also would be of immense help inobviating the situations explained in examples (2), (4) and (5).

It may be thought that section 3-805 of the U.C.C., which statesthat Article 3 "applies to any instrument whose terms do not precludetransfer and which is otherwise negotiable within this Article butwhich is not payable to order or to bearer, except that there can be noholder in due course of such an instrument," is sufficiently broad tocover the fact situations delineated by the author. But this is notnecessarily true. If the drawer in all the above examples shouldstrike the words of negotiability from the instrument, there could beno holder in due course, but all the other provisions of Article 3 wouldapply. As a result, the dishonest possessor of the "3-805 non-negoti-able check" merely would eliminate the indorsement step withoutany concomitant reduction in loss to the drawer, drawee and collect-ing banks in the respective problems. The dishonest person does notneed the insulation of a holder in due course if he personally canpresent the check to the drawee-payor bank and receive payment.10

Suggested Check Form

In short, what is needed is an instrument which calls upon a bankto pay the payee, but which can be neither negotiated to a holder indue course nor assigned to anyone for the purpose of collection ex-cept a bank in which the payee has an existing account. Such aninstrument would work in the following way if we take example (2)above as an illustration. The dishonest employee supplies his em-ployer with the name of a supplier-The Acme Company-as a credi-tor. In fact, Acme has not invoiced the employer for a present obliga-tion but has sold goods in the past to the employer. The employer'streasurer signs an instrument made payable to The Acme Companywhich calls upon the drawee to pay The Acme Company when thecheck is presented by a collecting bank in which Acme has an account.Now, if the employee desires to effectuate his fraud, he must previ-

10 For a succinct critique of U.C.C. § 3-805 see Britton, Formal Requisitiesof Negotiability-The Negotiable Instruments Law Compared with the Pro-posed Commercial Code, 27 RocxY MT. L. REV. 1, 3 (1953). But see H. BAIMY,THE LAW OF BANK CHECKS 51-56 (3d ed. 1962), where a contrary view is putforth concerning the desirability of non-negotiable checks.

The use of restrictive indorsements would seem also to be of limitedutility under the U.C.C. in preventing the losses illustrated in the aboveexamples. See U.C.C. § 3-206 & Official Comment.

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NON-NEGOTIABLE CHECKS

ously have opened an account in a bank in the name of The AcmeCompany before this "instrument" is deposited for collection. The

depository-collecting bank will have required presentation of certainpapers for the establishment of this account, and its fraudulent pur-

pose may come to light during this process. In addition, the dishonestemployee must open similar accounts for other fraudulent payees inorder to carry out his scheme, and it is likely that he will run out ofbanks before he is able to develop his scheme to the fullest extent.If he chooses the names of real companies or real individual payees(and he must do so in most cases in order to fool his employer), thepossibility of detection will be increased by the necessity of openingthese accounts.

The use of this instrument in example (1) would give the de-frauded vendee an opportunity to stop payment on his check since

the payee could not indorse to a holder in due course but would becompelled to deposit the instrument in his bank for collection. Simi-larly, the imposter in example (3) would be required to open an ac-count, which takes some time to process, and since speed and sim-

plicity are essential to the successful effectuation of the imposter or

assumed name type of fraud, the difficulty of the task would be

greatly increased. Likewise, the restriction on negotiation inherentin this instrument would reduce the likelihood of the alterations and

forgeries outlined in examples (4) and (5).

Clearly, the restricted check form suggested here would intensifythe difficulties of attempted wrongdoing in such cases, and would

increase the chances of detection of any scheme of this type. It is

not contended that such an instrument would be a panacea. However,

it should help to reduce the volume of this type of fraudulent conduct.

Because of the limited protection afforded by section 3-805 of theU.C.C., it would appear that the successful introduction of this pro-posed instrument would require legislation. It is hoped that thefollowing discussion dealing with "crossed" checks, "account payee"

checks and non-negotiable checks under the law of England, the

Geneva Check Convention, 1 Continental Europe and Latin Americamay offer some suggestions.

I. English Practice

A. Crossed Check Principles

At the outset, it should be noted that the provisions of the Eng-lish Bills of Exchange Act of 1882 and the Cheques Act of 1957 dis-

11 Convention Providing a Uniform Law for Checks. Opened for signa-ture at Geneva, March 19, 1931. League of Nations Document, C. 194. M. 77.1931. 11. B., 143 L.N.T.S. 395 (1934), reprinted in 5 M. HuDsoN, INTERNATiONAL

LEGISLATION 889-913 (1936).

November 19681

cussed in this section of the article are still the applicable law inEngland. The English Bills of Exchange Act of 1882,12 borrowingheavily from the Drafts on Bankers Act of 1856,'1 the Drafts onBankers Act of 185814 and the Crossed Cheques Act of 1876,15 pro-vides that any drawer or holder of a check may draw "two paralleltransverse lines" across the face of the check. 6 This "crossing"means that the check has been crossed generally. Either the draweror the holder may insert the words "and company" and additionallyor alternatively the words "not negotiable" inside these two lines andthis also will constitute a "general crossing."'1

Further, the drawer or holder may add the name of a specific bankacross the face of the check. This addition will constitute a specialcrossing.'8 The bank's name may be added either with or without thewords "not negotiable," and the Act does not require that the bank'sname be inserted between two transverse lines, although it is cus-tomarily done this way.19

Pursuant to section 79 of the English Bills of Exchange Act, thedrawee-payor-bank on whom a crossed check is drawn must, if thecheck is crossed generally, pay it to a bank or, if it is crossed specially,pay it to the designated bank or the designated bank's collectionagent if the agent is also a bank.20 If the drawee fails so to paythe instrument, he is liable by the terms of the Act to the "trueowner" of the check for any loss which may be incurred as a result ofthe improper payment.21

Although it is not entirely free from doubt, it appears that thewords "true owner" in this section of the Act refer to the drawer insituations where, for example, he has had the check stolen from himprior to its issuance to the payee.22 If these words refer to the

12 45 & 46 Vict., c. 61.'3 19 & 20 Vict., c. 25.14 21 & 22 Vict., c. 79.15 39 & 40 Vict., c. 81. For a succinct statement of the origin and

development of crossed checks, see J. HOLDEN, THE HISTORY OF NEGOTLABLEINSTRUMENTS IN ENGLISH LAW 229-41 (1955). See also J. SMTH, A CoMVIPEN-DIUM OF MERCANTILE LAW 269-75 (13th ed. 1931).

16 B.E.A. §§ 76-77. See Appendix A for illustrations of generally crossedchecks.

17 B.E.A. §§ 76-77.18 Id. See Appendix B for illustrtaions of specially crossed checks, and

also an example of a "Not Negotiable A/C Payee Only" check.19 M. MEGRAH, BYLEs ON BiLLs OF EXCHANGE 254-56 (22nd ed. 1965)

[hereinafter cited as BYLES].20 B.E.A. § 79.21 Id.22 Cf. BYLEs 296; M. MEGRAH, PAGET'S LAW.OF BANKING 285-86 (6th ed.

1961) [hereinafter cited as PAGET].

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payee, who has had the check stolen from him, rather than the drawer,they seem somewhat redundant in light of section 80 of the Act.Section 80 provides that when the drawee-payor pays a crossed checkin good faith and without negligence to a bank, in the case of a generalcrossing, or to a specific bank, in the case of a special crossing, after"the check has come into the hands of the payee," both the drawee-payor and the drawer "shall respectively be entitled to the same rightsand be placed in the same position as if payment of the check hadbeen made to the true owner thereof. '23 Under this latter section, apayee who has had the check stolen from him and then collected by aforger would have no recourse against the drawee-payor nor againstthe drawer.24 In effect, the law would consider that the checkhas been paid to the payee, and he would have no recourse against thedrawer either on the check itself or on the underlying obligation forwhich it was issued. 25

A corollary to this protection afforded the drawer and drawee-payor-bank was articulated in former section 82 of the English Billsof Exchange Act. It was there provided that if a collecting bank ingood faith and without negligence received payment of a crossed checkfor a customer who had either no title or a defective title thereto, thecollecting bank would incur no liability to the true owner of thecheck for merely receiving such payment.26

Section 82 was repealed by the Cheques Act of 1957,27 but itsexculpatory provisions were reenacted and enlarged by the latterAct.28 Under section 4 of the Cheques Act of 1957, when a bank ingood faith and without negligence receives payment of a check for acustomer, or "having credited a customer's account with the amountof such an instrument, receives payment thereof for himself," andthe customer has either no title or a defective title to the check, thebank incurs no liability to the true owner of the instrument formerely having received payment.29 It is to be noted that this samesection provides that a bank is not to be considered negligent formerely failing to concern itself with the absence of or an irregularityin the indorsement of a check.3 0 It is also to be noted that section 4protects the collecting bank on all checks-whether crossed or un-crossed.

31

23 B.E.A. § 80; PAGET 278.24 PAGET 278.25 Id.26 B.E.A. § 82.27 Cheques Act, 1957, 5 & 6 Eliz. 2, c. 36.28 Cheques Act, 1957, 5 & 6 Eliz. 2, c. 36, § 4.29 Id.30 Id.31 BYLEs 283.

November 1968]

Neither the Bills of Exchange Act of 1882 nor the Cheques Act of1957 defines the word "customer," but it would seem that a customermust have an account with the bank in which the crossed check isdeposited for collection. The presenter of a check for a cash paymentwho does not have an account in the bank would not be a customerwithin the meaning of the acts.8 2 Unfortunately, it appears that nofixed period of time is required in order for a depositor to become acustomer; a depositor may open his account with the very check inquestion and the courts will treat him as a customer.33 It must beremembered, however, that the collecting bank must act "in goodfaith and without negligence" in receiving payment for the customeror in crediting his account in advance of collection. It may be con-sidered evidence of negligence if the collecting bank fails to makeadequate inquiry concerning the identity of the person opening theaccount.34 From the above discussion, it is apparent that the crossedcheck process is designed primarily to prevent the cash payment ofitems.

B. Contrast with Uniform Commercial Code

In order to place these crossed check rules in their proper perspec-tive it is important to remember that other sections of the EnglishBills of Exchange Act of 1882 give protections to an English bankwhich are quite different from those afforded by the U.C.C. to itsAmerican counterpart. In England, when an ordinary check is paidby the drawee-payor in good faith and in the ordinary course of busi-ness, he is deemed to have paid the check in due course even thoughthe payee's indorsement is forged or is made without authority.35

Also, the collecting bank is not liable if it receives payment of such aninstrument for a customer. Neither the American N.I.L. nor theU.C.C. affords similar protection to the drawee-payor. 36

The English practice differs, however, in the crossed check situa-tion. In order to avoid possible liability for payment on a forged in-dorsement, the English drawee, when dealing with a crossed check,must see that the check is paid to a bank rather than to an individualpresenter." In this sense the English crossed check rules are moreburdensome for the drawee than the rules governing ordinary checks.

32 Great W. Ry. v. London and County Banking Co. [1901] A.C. 414.33 Commissioners v. English, Scottish and Australian Bank, Ltd. [1920]

A.C. 683 (P.C. New So. Wales); BYLES 284; PAGET 11-15.34 BYLEs 288-91; PAGET 361-62.35 B.E.A. § 60; see Murray, Forged Bills of Exchange and Checks: A

Comparison of the Anglo-American, European and Latin American Law, 82BANK. L.J. 565 (1965) [hereinafter cited as Murray].

86 Murray, supra note 35, at 565.37 B.E.A. § 80.

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It is evident that the crossed check rules exist in England upon a legalframework which is different, at least as regards liability for forgedindorsements, from that prevailing in the United States. But if simi-lar crossed check rules were adopted in the United States the addedburden would not be great since the drawee is already responsiblefor forged indorsements.38

Somewhat surprisingly, a crossed check may be negotiated to aholder in due course unless the words "not negotiable" appear be-tween the two transverse lines, and even if these words are added thecheck still may be transferred but the transferee cannot be a holderin due course.39 Section 3-805 of the U.C.C. likewise permits thetransfer but not the negotiation of a non-negotiable instrument, butthe drawee is not required under the U.C.C. to make payment to acollecting bank rather than to a presenting individual holder of thecheck, as is required under English crossed check rules. As a practi-cal matter, it would seem that if a check were crossed specially(with the name of the payee's bank) and the words "not-negotiable"were added, most potential transferees would hesitate to purchase thecheck unless they had the same bank. It likewise would seem thatmost businessmen would be extremely reluctant to purchase anycrossed check which had the words "not negotiable" written on itsface unless they were certain of the reliability of the holder. Thus,the wording "not negotiable" would not prevent transfer, but itshould reduce substantially the ease of transfer.40

C. Crossed Check with "Account Payee" Notation

The practice developed in England of adding the words "A/Cpayee" or "account payee" or similar words to the crossing of thecheck, even though the English Bills of Exchange Act of 1882 did notexpressly countenance this procedure.4 1 The presence of these wordsimposes a duty of inquiry as to ownership on the collecting bank, andfailure to discharge this duty may amount to negligence,42 subjectingthe collecting bank to liability to the payee. The negligence in thisinstance is allowing someone other than the true owner to obtain pay-ment of the instrument. "[I] t eventually became established that tocollect such a cheque for a person other than the payee without

38 U.C.C. § 3-419(1) (c).39 PAGET 214-20.40 Id.41 BYLES 296-97; PAGET 220-23; J. HOLDEN, THE HISTORY OF NEGOTIABLE

INSTRUMENTS IN ENGLISH LAw 241 (1955); J. SMITH, A CoMPENDinm OF MER-cANTILE LAW 269-70 (13th ed. 1931). See Appendix C for illustrations of"account payee" cheeks.

42 House Property Co. v. London County & Westminster Bank, [1915] 85L.J.K.B. 1846; BYLES 296-97.

November 1968]

making reasonable inquiries constitutes negligence. '43 Thus, thewords "account payee" do not render the check non-transferrable,but it is evident that the threat of liability will impede the ease oftransfer.4

4

The practice of adding the words "account payee" to the crossingbears great resemblence to the German provision which preventsthe cash payment of checks exhibiting the words Nur zur Verrech-nung (only for set-off in account). The "account payee" check wasin use in England sometime prior to 185245 and it is somewhatdifficult to say that the English practice came from German law,although it may have come from German banking practice. It wouldappear that the German legislation of 190846 was the source of similarrules in the Geneva Check Convention, which will be discussed inthe next section of this article.

11. Continental EuropeIn order to examine fruitfully the check law of Continental

Europe, some differences from American law should be noted. Adrawee in most Continental European countries is not liable to thedrawer if it honors in good faith a check bearing the forged signa-ture of the drawer. In addition, a bona fide holder may acquire goodtitle to a non-crossed check which bears the forged indorsement of thepayee, and a collecting bank will be protected if it collects a checkfor such a holder. The crossed check and account payee rules arean attempt to give some measure of protection to the drawer and thepayee against forgery of their respective signatures. 47

A. Geneva Check ConventionThe Geneva Check Convention of 193148 in Annex II, articles 37,

38 and 39, adopted crossed check and the account payee check prin-ciples. In these articles the Convention borrowed extensively fromEnglish and German law, but did not incorporate the comprehen-siveness of either. The signatories to this Convention undertook, with

43 J. HOLDEN, THE HISTORY OF NEGOTIABLE INSTRUMENTS La ENGLISH LAW

241 (1955).44 House Property Co. v. London County & Westminster Bank, [1915] 85

L.J.K.B. 1846; BYLES 296-97.45 Bellamy v. Majoribanks, 155 Eng. Rep. 999 (Ex. 1852).46 German Law of March 11, 1908, [1908] Reichsgesetzblatt (RGBI) 71.47 Murray, supra note 35, at 565.48 Convention Providing a Uniform Law for Checks. Opened for signa-

ture at Geneva, March 19, 1931. League of Nations Document, C. 194. BE 77.1931. H. B., 143 L.N.T.S. 395 (1934) [hereinafter cited as Geneva CheckConvention], reprinted in 5 M. HUDSON, INTERnATIONAL LEGISLATION 889-913(1936). See generally Feller, The International Unification of Laws Concern-ing Checks, 45 HARV. L. REV. 668 (1932).

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certain expressed reservations, to introduce in their respective coun-tries the substance of the principles adopted at the Convention.49

Article 37 provides, similarly to the English rule, that a crossingmay be general or special. The general crossing may consist simplyof two parallel lines on the face of the check, or of such lines with theaddition of the name of the bank or some equivalent. The specialcrossing requires the name of the bank to be written between thelines, and while a general crossing may be converted into a specialcrossing, a special crossing may not be converted into a generalcrossing.5 0

Article 38 provides that a check which is crossed generally can bepaid by the drawee only to a bank "or to a customer of the drawee."51

The specially crossed check can be paid by the drawee only to aspecified bank, "or if the latter is the drawee, to his customer."52

The named bank of the specially crossed check may allow the check tobe collected by another bank, however. A collecting bank may take acrossed check only from one of its customers or from another bank,but it may not collect such a check for any other person. If the draweeor a bank fails to observe these rules, it is liable for the resultingdamage up to the amount of the check. 53

It is to be noted that the Geneva Check Convention does notfollow the English rule that the words "not negotiable" may beadded between the two parallel lines, thereby making the check non-negotiable. However, article 14 provides that when an ordinarycheck is made payable to a specified person and the words "not toorder" or any equivalent expression have been inserted, it can betransferred only "according to the form and with the effects of anordinary assignment." Under the Convention, the drawer may,therefore, draw a check payable to a specified person "not to order"and then cross it specially. By this process, he may escape the oner-ous provisions of the Convention, which state that a holder who hasacquired a check in good faith and without being chargeable withgross negligence is deemed the lawful holder of an indorseablecheck even though the payee's signature has been forged.54 Thisprocess has no counterpart in the United States.

The Convention codified the German "account payee" practice,and as codified it does not seem to be a part of the crossing process asit is in England. Article 39 provides that the drawer or the holder of

49 Geneva Check Convention, arts. 1-11, Annex II, arts. 1-31.50 Geneva Check Convention, Annex I, art. 37.51 Id., Annex I, art. 38.52 Id.

53 Id.54 Id., Annex I, arts. 19, 35.

November 19681

a check may forbid its payment in cash by writing transverselyacross the face of the check the words "payable in account" or a simi-lar expression. The drawee then may pay the check only "by meansof [a] book entry (credit in account, transfer from one account toanother, set off or clearing house settlement)," and the drawee whofails to comply with these rules "is liable for [the] resulting damageup to the amount of the cheque." 55 Although it is not expresslystated, it would appear that a check made "payable in account" wouldhave the same effect as a crossed check since, if the drawee mustpay the check by means of a bookkeeping entry rather than in cash,the holder of the check would be required to make presentation

55 Id., Annex I, art. 39. The Geneva Check Convention provisions re-garding the crossed check and the account payee check may be traced to Reso-lutions 19 and 20 of the Hague Conference of 1911:

"Art. 19. The check crossed on its face (au recto de-literally on its firstpage) by two parallel lines may not be paid except to a banker.

"The crossing may be effectuated by the drawer or by a holder."The crossing may be general or special."The crossing is general if it does not bear between the two lines any des-

ignation or it mentions banker, an equivalent term or simply et cie; it is spe-cial if the name of a banker is written between the two lines.

"The general crossing may be transformed into a special crossing. But thespecial crossing may not be transformed into a general crossing.

"The check crossed specially may not be paid except to a designatedbanker. However, if the latter does not make the collection by himself, hemay substitute another banker for himself.

"It is forbidden to erase the crossing as well as the name of the designatedbanker.

"The drawee who pays the crossed check to a person other than a banker,if the crossing is general, or to a person other than the designated banker, ifthe crossing is special, is responsible, as the case may be, for harm caused,without the damages-interest being to exceed the amount of the check.

"The power of excluding the system of crossed checks is reserved to thecontracting States, for checks payable in their territories.

"Art. 20. The drawer as well as any holder of a check may prohibit thatthe check be paid in cash, by including on the face, the transferal statementto hold in account (d porter en compte) (Nur zur Verrechnung) or an equiva-lent expression. In this case, the check may only be liquidated by means of asettlement in writing (credit in account, transfer or compensation). The set-tlement in writing is equivalent to payment. The statement hold in account(d porter en compte) may not be revoked.

"The violation of said statement renders the drawee responsible for theharm caused, without the damages-interest being to exceed the amount of thecheck.

"It is reserved to the contracting States, with respect to the checks payablein their territories, the power of regulating the effects of said clause in thecase of insolvency of the drawee, as well as of excluding the system of checkswith the statement to hold in account (6 porter en compte) ."

Text of the Hague Rules were translated by the author from the French textprinted in J. BOUTERON, LE CniEQm 318-19 (1924).

THE HASTINGS LAW JOURNAL [Vol. 20

through a bank in which he had an account.The signatories to this Convention reserved the right "to recognize

in... [their] national law only crossed cheques or only cheques pay-

able in account."56 The signatories also agreed that where one na-tion recognizes only crossed checks, a check issued in another nationand in the other form (check payable in account) would be treatedas a crossed check, and vice versa.57 For example, a crossed checkissued in France, which recognizes only crossed checks, and payable inGermany, which recognizes only checks payable in account, would betreated as if it were a check payable in account. Likewise, a payablein account check issued in Germany but payable in France would betreated as if it were a crossed check.5"

B. Acceptance of the Convention's Rules

The Geneva Convention was signed by England, France, Germany,Italy, Spain and numerous other countries, 9 but the crossed checkand payable in account concepts were not adopted uniformly by the

signatories. In addition, the Geneva rules suffered some minorchanges and condensations in the various translations. The Geneva

crossed check rules had to compete with earlier versions in force in

some European countries which obviously were borrowed from Eng-land.60 As previously indicated,6' the English crossed check rules aremore extensive than the Geneva rules; also, England has not enactedthe payable in account rules which the Convention propounds as acomplement to the crossed check concept. As will be seen, the Con-

vention's goal of providing a uniform law for checks has not beenfully realized.

France adopted articles 37 and 38 of the Convention as its domesticlaw in 1935.62 Article 38 was modified slightly, but without any sig-

56 Geneva Check Convention, Annex II, art. 18.57 Id.58 4 E. :ABEL, THE CONFLCT OF LAws: A COl PARATIVE STUDY 235 (1958).59 The original signatories are listed in 5 M. HuDsoN, INTEPNATIONAL

LEG sLATiON 890-92 (1936).60 For example, the Spanish Code of Commerce of 1886 provides: "The

drawer or any legal holder of a mandate of payment [mandato de pago-acheck under Article 534] has the right to indicate on it that it shall be paidto a banker or determinate Society, which shall be expressed by writing be-tween crossed lines on its face the name of said banker or society or only thewords 'and company.'

"Payment made to another person who is not a banker or the indicatedsociety shall not relieve the drawee of responsibility if he has paid it improp-erly." CODIO DE CoERcIo art. 541 (1886).

61 See text accompanying note 32 supra.62 Decree of Oct. 30, 1935, art. 37, [1935] Journal Officiel de la Rpublique

Francaise (J.O.) 11543 [1935] Bulletin Legislatif Dalloz 948. See Appendix Dfor an illustration of the French form of a generally crossed check.

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nificant change in the provision's effect.03 France did not adopt thepayable in account check concept of article 39,64 however, and pursu-ant to the authority conferred by Annex II, article 18, of the GenevaConvention adopted legislation which provides that "checks payablein account issued to foreigners and payable in French territoryshall be treated as crossed checks." 65

In discussing the application and usefulness of the crossed checkconcept in France, Professor Ripert has observed:

The usefulness of this form of check is twofold: on the one hand, itavoids the risk of loss or theft, as the thief himself will not be ableto present the check for collection and will find no bank willing topresent it; that is why those checks are sent by ordinary mail with-out registering it; on the other hand, as the check must be remittednecessarily to a banker it will not be paid in money but will be credi-ted to the account of the client ....

However, such security is less complete than it is thought. It ispossible, in effect, to falsify the check by means of "cleaning" thecrossed lines, and any banker that would pay the bearer, if it wasnot possible to suspect any falsification, will have paid correctly...Besides, a crossed check may be indorsed, and if it has been indorsedby the thief in favor of a third party in good faith, this one will nothesitate in presenting it to his own banker in order to collect it.All in all, in spite of these dangers which are exceptional the securityis still great....

The crossed check can be endorsed.., but a banker can acquire acrossed check only from a person authorized to present it. In orderto collect it, he may ask another banker. The banker will be re-sponsible up to the amount mentioned in the check, for any damagedue to the lack of observance of these provisions. It is true, on theother hand, that these are very annoying for the persons who receivea crossed check and have no account in any bank.66

Professor Ripert, in examining the check payable in account orclearing house settlement (cheque & porter en compte ou de com-pensation) has noted:

In some foreign countries there is a different kind of check which willnever produce a payment in cash. The amount of the check has to beobligatorily payable in account and the check, therefore, cannot beused if not in view of a clearing house settlement. The GenevaConvention admitted this type of check as valid, but not so theFrench law. This one [the Geneva Convention] provides that anycheck of that nature, drawn in a foreign country, and to be paid inFrench territory, will be treated as if it were a crossed check. . . 67

Italy in 1933 adopted articles 37, 38 and 39 of the Geneva Con-

63 Decree of Oct. 30, 1935, art. 38, [1935] J.O. 11543, [1935] Bulletin Leg-islatif Dalloz 948, as amended, Decree of May 24, 1938, [1938] J.O. 5875, [1938]Bulletin Legislatif Dalloz 329.

64 G. RIPERT, TRAITS ELEMENTAIRE DE DROIT Co1'.1m4xscIAL 753-54 (1951).65 Decree of Oct. 30, 1935, art. 39, [1935] J.O. 11543, [1935] Bulletin Leg-

islatif Dalloz 948.66 Id. For a superb description of French banking practice regarding

crossed checks, see Farnsworth, The Check in France and the United States,36 TuT. L. REv. 245, 266-68 (1962).

67 G. RIPERT, TRAITE ELmiENTAIRE DE DRorT CoiVnmcIAL 754-51 (1951).

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NON-NEGOTIABLE CHECKS

vention, thereby incorporating the crossed check and payable in ac-count check principles as part of its domestic law.68 In addition, theItalian law incorporated a provision recognizing the "non-transfer-able" check.69 The Italian writer, Messineo, in explaining the distinc-tion between the "non-transferable" and the non-negotiable check,has stated:

[T]he [non-transferable] check may not be transferred except to abanker and with the purpose of collection; the indorsement made toanother person, or further made by the bank, shall be held as notbeing written. The clause "not transferable" has greater efficacythan the clause "not to order," because it makes non-valid, not onlythe indorsement, but also the assignment (cesi6n ordinaria) of thecheck7

0

The English crossed check practice was unknown to German lawprior to the Geneva Convention.71 The German Law RegardingChecks of 1933 adopted articles 37 and 38 of the Convention, whichembody the crossed check principles, subject to the qualification thatthese rules were to come into force at a later time to be determined

68 Royal Decree of Dec. 21, 1933, No. 1736, arts. 40-42, [1933] Gazetta Uffi-ciale della Repubblica Italiana (Gaz. Uff.) N. 300, [1933] La LegislazioneItaliana (Unione Tipografico-Editrice Torinese) 2038, at 2044.

60 Id. art. 43. The provision is as follows: "The check issued with theclause 'non-transferable' may not be paid except to the payee or, on his de-mand, by crediting it to his account. The latter [i.e., the payee] may not in-dorse the check unless to a banker for collection who may not further indorseit. Indorsements made in spite of this prohibition shall be considered as notbeing written. The cancellation of this clause is considered as non-existent.

"He that pays a non-transferable check to a person different from thepayee or from a banker indorsing it for collection shall be liable for the pay-ment.

"The clause 'non-transferable' must also be affixed by the bank [upon thecheck] upon demand of its customer.

"The same clause may be affixed by an indorser with the same effect."The provisions of the present article shall be applicable solely to the

check payable in the territory of the Kingdom or in territory subject to Italiansovereignty."

See Appendix E for an illustration of an Italian "non-transferable" check.M. TONDo, MANUALE D GIURISPRUDENZA IN MATERIA BAUNCAA 155 (1964)

(assengo bancario, assengo circolare e titoli speciali) in disscussing the non-transferable check has stated that "[t]he Supreme Court in a recent decisionhas maintained, also, that the drawee Bank (banca trattaria) that pays to aperson other than the acceptor or payee (prenditore) or the indorsee bank forpayment purposes, will be subject to repeat the payment even if the errorin identification of the accipiens is not due to dolus or grave fault; the 2d par.of art. 43 L.a. must be construed in the sense that the drawee (trattario) is re-leased only if it pays the acceptor or payee (prenditore) or the indorsee bankfor payment, and the identification system is left to its discretion because itpays on its own risk and liability, and therefore it will not revert in its favorthe total absence of fault due to erroneous identification."

70 3 F. Msssmno, MAxuALE Di DniTRio CiviLE E. CommWxciALE 408 (1959).71 A. BAUMBACH & W. HEFERmH, WECHSELGESETZ UND SCHECKGESETZ 399-

400 (1962).

November 1968]

by the Reich Minister of Justice.7 2 It must be noted, however, thatas of the time of this writing, the Minister of Justice (now FederalMinister of Justice) has not ordered the cross check rules put intooperation.

While the crossed check is an English invention, the "accountpayee" check (Nur zur Verrechnung or Verrechnungscheck) (onlyfor set-off in account) is a German development 73 which was rec-ognized by article 39 of the Geneva Convention and was rearticu-lated in the German Law Regarding Checks of 1933. 7 4 The Nur zurVerrechnung check is designed for a cashless payment; it would notbe permissible for a drawee to pay the presentor-holder in cash eventhough he might be a customer of the drawee. Payment would haveto be made by crediting his account. In the event that the presentingholder should open an account with the drawee at the same time ashe presented the Nur zur Verrechnung check, the drawee must useparticular caution in order to prevent a circumvention of the man-date on the check. If the drawee should pay cash for this kind of acheck, it is doubtful whether he could escape liability by showingfreedom from negligence in other aspects of the payment.7 5 Al-though neither the Geneva rules nor the German law literally forbidthe negotiation or transfer of the Nur zur Verrechnung check, it hasbeen stated that if a third party takes such a check he does so at hisperil, for he is put on notice of a possible infirmity. The negotiabil-

72 German Law Regarding Checks of Aug. 14, 1933, arts. 37, 38, [19333Reichsgesetzblatt (RGBI) I 597, translated from A. BAUMBACH & W. HEFER-MEHL, WECHSELGESETZ UND SCHECKGEsETz 381-82 (1962).

73 See text accompanying notes 45-46 supra. See generally Crauford, Dif-ferences Between the English and German Law Relating to Negotiable Instru-ments, 6 INT'L & COMp. L.Q. 618, 640; Schuster, The German Statute as toCheques, J. Comp. LEG. (n.s.) 79 (1908).

74 German Law Regarding Checks of Aug. 14, 1933, art. 39, [1933] Reichs-gesetzblatt (RGBI) I 601, translated from A. BAUMBACH & W. HEFERAM,

supra note 56, at 382.The provision for the Verreschnungsscheck (check only for set-off in ac-

count) reads:I The issuer as well as any holder of a check may, by a notice put on the

front side of a check crosswise, reading "only for set-off in account," orby some other notice with the same meaning, prohibit that the check bepaid in cash.

II The drawee can, in such a case, redeem the check only by way of creditingthe amount (Verrechnung, Ueberweisung, Ausgleichung). The fact ofcrediting amounts to payment.

III The striking of the notice "Nur zur Verrechnung" is considered not to haveoccurred.

IV The drawee who acts contrary to the above provisions, is liable for dam-ages but only up to the amount of the sum of the check.See Appendix F for illustrations of the Nur zur Verrechnung check.75 A. BAUMBACH & W. HEFERmEHL, supra note 71, at 399-400.

THE HASTINGS LAW JOURNAL [Vol. 20

ity of this type of check is thereby impeded.7

H. Latin America

This section of the article will explore the influence of the Englishand Geneva Check Convention rules on Latin American law.77 It is

intended as a survey of the Latin American practice rather than asan in-depth analysis of such practice.

Both Panama and Colombia have adopted the Negotiable Instru-ments Law of the United States, 78 but only Colombia has engraftedthe N.I.L. upon an existing codification dealing with crossed checks.The Colombian law provides for general and special crossings in amanner similar to the English practice.79 Unlike the English prac-tice, however, but similar to the Geneva Convention rules, no provi-sion is made for insertion of the words "not negotiable," which wouldsignify that one who receives an instrument with such notation couldnot have nor transmit more rights in it than his transferror possessed.It is further provided in the Colombian law that the drawee is madeliable to "the true owner of the check"8 0 for any loss suffered as aconsequence of irregular payment. It should be noted that thisphrase, "the true owner of the check," is found in the English rulebut was not incorporated into the Geneva Check Convention. TheColombian law makes no provision for checks payable to the accountof the payee.

76 Id.77 It is interesting to note Stanowsky's discussion of the former Argentine

crossed check rules and their relation to English and Geneva Check Conven-tion rules: "If in the legislation of checks in general is the application, inprincipal, of the convention of Geneva, the same may not occur with crossedchecks, of purely English origin and of great root (gran arraigo) in our coun-try [Argentina], in such form that it is applied in practice in spite of theerrors of our positive legislation.

"The Convention of Geneva, although it pays attention to crossed checksand [checks] for bookkeeping, is not executed with the precision and ampli-tude of the English legislation.

"In the first place, it [the Geneva Convention] pays no attention to theclause not negotiable, which in a general crossing as well as a special crossing,signifies that he who receives said check does not have nor may he transmitmore rights over the same than he who delivered it to him. The clause "notnegotiable" does not impede the circulation and, therefore, the transmission ofthe check by indorsement. It only limits the effects of the same on account ofthird persons." 2 M. SATAwowsY, TRATADO DE DEREcHO COMERcIAL 140-41(1957).

78 Law of March 13, 1917, Ley 52 de 1917 (Panama); Law of July 19, 1923,Ley 46 de 1923 (Colombia). See also the special law for checks of Dec. 16,1916, Ley 75 de 1916 (Colombia).

79 Special law for checks of Dec. 16, 1916, Ley 75 de 1916, arts. 8-10.80 Id. art. 10.

November 1968] NON-NEGOTIABLE CHECKS

The former version of the Peruvian crossed check law was a reproduction, with minor omissions, of a provision of the CommercialCode of Spain.81 This Peruvian law was amended in 1967 to estab-lish more comprehensive crossed check rules.82 It now provides thata check may be crossed generally or specially. It is crossed generallyif the crossed lines are present either without further notation orwith the word "bank" or an equivalent term The crossing is specialif the name of a specific bank is placed between the lines. 83

The crossing may be either general or special and may be madeby the drawer 84 or by the holder when the check has been issuedwithout a crossing.85 When a specially crossed check has been deliv-ered to the proper bank that bank may, in turn, cross it again toanother bank for collection. 8 Also, a bank which receives a generallycrossed check may cross it specially to its own name.87 "The gener-ally crossed check may only be paid by the drawee to another bankor to its [own] customers. 8 The specially crossed check "may onlybe paid by the drawee to the designated bank; and if the latter is thedrawee, to its [own] customer." The designated bank may, however,"have recourse to another bank in order to collect the check."89 "Abank may only acquire a crossed check from one of its customers orfrom another bank. It may not credit it (ingresarlo in caja) for thecount of other persons, except those previously mentioned ["collect-ing banks"] "90

It should be noted that these crossed check provisions, like theColombian provisions, make no mention of inserting the words "notnegotiable" between the crossed lines. However, the rule that banksmay not acquire crossed checks except from one of their customerswould seem to restrict the application of the negotiability concept toa limited class of potential holders. Further, a separate provisiondeals with the "non-transferable check" in a manner unique toLatin America.91 This most interesting provision is as follows:

The check with the clause "not transferable," "not negotiable" orother equivalent may only be paid to the person in whose favor it isdrawn, or, to his asking [i.e., a check drawn payable to X or to the

81 CODIGO DE COmERCiO art. 532 (1902) (Peru), reproducing CoDIGo DE

Coi-acio art. 541 (1886) (Spain).82 Ley No. 16557, effective Sept. 1, 1967.83 Id. art. 147.84 Id.85 Id. art. 148.86 Id.87 Id.88 Id. art. 149.89 Id.90 Id. art. 150.91 Id. art. 153.

THE HASTINGS LAW JOURNAL [Vol. 20

order of X], it may be credited in his current account, save [when itis] indorsed simply to a bank in order to effect its collection.

The mentioned clause made by the indorsee produces the sameeffects.

The drawee who pays a non-transferable check to a person dif-ferent from the holder or the indorsee bank for collection shall beresponsible for the effectuated payment.

Indorsements made in spite of the prohibition, as well as thebarring (tarjadura) of the clauses provided in the present article,shall be taken as not being made.92

This new Peruvian check law also has enacted the payable inaccount concept. It is provided that the drawer as well as the holderof a check may prohibit its payment in cash by placing the words "forcredit in account (para acreditar on cuenta) or other equivalent" 93

on the face of the check. The drawee bank must heed the order bycrediting the value of the check in the customer's account, but thedrawee bank is obligated only to credit the check for those who have acurrent account.9 4

It is submitted that the Peruvian version of a non-transferablecheck has eliminated the real need for the crossed check or thecheck payable in account rules because it accomplishes the objec-tives sought by having a crossed check made payable in account, and,in addition, prevents an indorsee from obtaining title to such a check.Adoption of a similar rule in the law of the United States wouldalleviate many of the problems outlined in the introduction to thisarticle.

The Bolivian Check Law of 191295 apparently is verbally andconceptually different with respect to crossed check rules from any ofthe other Latin American codifications. Under Bolivian law eitherthe drawer or the holder has the right to restrict payment of thecheck to "a determined person or society."9 6 This is accomplishedby placing two parallel lines on the face of the check and insertingthe words "Crossed in favor of. . . [and] by adding the complete nameof the comptroller (interventora), person or society."9 7 In this case,the check is "crossed in particular and it shall not be negotiable,"and the drawee may not pay it except to a bank or society whosename is indicated on the check.9 8 Although the phrasing is awkward,it would appear that the "crossed in particular" check (specially

92 Id. art. 153.93 Id. art. 152.94 Id.95 Ley de Cheques of 1912, printed in CODIGos BoixvrNos 485-88 (3rd ed.

R.S. Mariaca ed. 1955).96 Id. art. 15.97 Id.98 Id.

November 19681 NON-NEGOTAB3LE CHECKS

crossed check to use the English terminology) in Bolivia is non-nego-tiable, while the specially crossed check requires the addition of thewords "non-negotiable" to achieve the same result in England.

A check "crossed in general" is one with the words "crossed ingeneral" inserted between two parallel lines.9 A check in this formmust be paid to a "mercantile society legally constituted in the coun-try [Bolivia]." The payor who violates the "crossed in particular"and "crossed in general" check payment rules is responsible to thedrawer for any damages.100 It should be noted that the BolivianCheck Law does not recognize the "account payee" check.

In 1919, seven years after Bolivia recognized the crossed check,Uruguay adopted the crossed check concept but with differing details.The generally crossed check in Uruguay must bear the word "bank"between two parallel transverse lines, and the drawee may pay onlya bank in this case.' 0 ' The specially crossed check must contain thename of the designated bank between the two lines, and the draweemay not pay it "except to the named bank or to another bank dulyauthorized to make collection.' 0 2 Either the drawer or the holdermay cross a check either generally or specially.10 3 The holder of agenerally or a specially crossed check "may add the words 'not nego-tiable.' These words signify that he who receives said check doesnot have nor may he transmit more rights about the same [check]than he who has received it.' 0 4 It is surprising to observe that thisrule allowing the holder to insert the words "not negotiable" does notseem to afford a similar right to the drawer.

An Uruguayan bank that pays a generally or specially crossedcheck to a non-bank, or that pays a specially crossed check to a bankwhose name does not appear on the check or which was not speciallyauthorized to collect it, shall respond to the drawer for the amount ofthe check plus interest. 0 5 Conversely, the drawee of a generally orspecially crossed check does not incur any responsibility if it paysin accordance with these rules "even when the check has been deliv-ered for payment by a person who has no right to its amount.' 06

As a corollary to this rule, a bank which in good faith and withoutnegligence credits the account of a customer with a generally crossedcheck or one crossed specially to his name, when this customer has

99 Id.

300 Id. art. 16.101 Ley 6. 895, de 24 Marzo de 1919, arts. 21, 22, printed in, CODIGO DE

CoMERcIo 772-75 (annotated by 0. Arariso & A. Z. Pintado 1952).102 Id. art. 23.103 Id. art. 24.304 Id. art. 26.105 Id. art. 27.106 Id. art. 29.

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no right to the check or when his right is defective, does not incurresponsibility in any respect to the true owner merely by reason ofhaving accepted payment.107

It might be thought that the previously discussed codes are merelyvestiges of early English and Continental European influence inLatin American commerce. However, the fact that relatively recentreforms in some Latin American countries have reincorporated thecrossed check and account payee concepts would seem to indicate asatisfaction with the system. For example, the 1963 Argentine checklegislation reforming the Code of Commerce has re-enunciated theseprinciples. 08 It is provided there, somewhat in accord with the Eng-lish rule, that a general crossing may consist simply of two linesdrawn on the face of the check, or it also may include the word"banker" between these lines, and, also, the words "not negotiable."' 09

The special crossing procedure is the same as in England. The gen-eral crossing may be converted into a special crossing merely by addingthe name of the bank, but the special crossing may not be convertedback into a general crossing." 0 The drawee may pay only to a bankin the case of a general crossing and only to the specified bank "orto another indicated bank" in the event of a special crossing."' Thedrawee or other bank which does not observe these rules shall beliable for the damages up to the amount of the check." 2 Also,Argentina's recent codification has adopted with only slightly dif-ferent wording the "account payee" concept articulated in article 39of the Geneva Check Convention. 113

Costa Rica reformed its Code of Commerce'14 in 1964, and alsocontinued the crossed check concept, though more concisely worded.In Costa Rica, for a general crossing the word "bank" must be in-serted between the two lines; in Argentina, the two lines alone aresufficient. "If to the word 'bank' there has been added the particularname of an establishment of this class [thereby creating a special

107 Id. art. 30.108 Decreto-Ley No. 4776, arts. 44, 45, 46 (1963), translated in comple-

mentary laws section of ARGENTnE COMMERCIAL CODE at 318-31 (ArgentlawsPub. ed. 1963).

109 Decreto-Ley No. 4776, art. 44 (1963), translated in complementarylaws section of ARG.ENTmE COMMERCIAL CODE at 318 (Argentlaws Pub. ed.1963). For a penetrating critique of the "non-negotiable" aspects of thisArgentine law, see Bustamante, El Cheque y La Clausula "No Negociable". 33LECCIONES Y ENSAYOS 167 (1966).

110 Decreto-Ley No. 4776, art. 44 (1963), translated in complementary lawsection of ARGENTINE CoMinwcIAI CODE at 318 (Argentlaws Pub. ed. 1963).

I Id. art. 45.112 Id.I's Id. art. 46.114 CODIGO DE COMERCIO (1964).

November 1968]

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crossing], the payment must be made only to this determined bank."115

The drawee is liable to the "true owner of the check" if it makes pay-ment to a presenter which is not a bank in the case of a generalcrossing, or is not the specified bank in the case of a special cross-ing.1 6

The clearest expression of the crossed check principles is foundin the 1951 Check Law of the Dominican Republic.117 The crossedlines must be written in ink, and these lines alone are sufficient tocreate a generally crossed check. If the name of a particular bank isinserted between the lines, then it is crossed specially. 18 The gener-ally crossed check "may only be paid by the drawee to its clients orto another bank.""09 This is one of the few codes which providesclearly for the situation in which both drawer and payee are clientsof the same bank. A specially crossed check "may only be paid bythe drawee to the designated bank, and if the latter is the drawee, itmay only pay to its customers."' 20 In all these cases, the bank desig-nated in the special crossing may utilize another bank in order tocollect the check. . 2 Banks may acquire crossed checks only for theirown customers or for another bank; they may not carry out the collec-tion except for the accounts of their customers or of other banks."[T]he person who has disposable funds" in a bank is the only onewho shall be considered a customer of that bank.122 This definitionof a "customer of a bank" bears great resemblance to the English rule.The drawee's liability for making an incorrect payment is limited tothe amount of the check. 23

115 Id. art. 826.116 Id. art. 827.117 CODIGO DE COMERCIO (F. Hernandez ed. 1950) (Dominican Republic),

as modified, Ley De Cheques No. 2859, arts. 37-38 (1951). The "account payee"check is also delineated in greater detail than in other Latin American codes:

"The drawer or the holder may prevent the check from being paid in cash,and for this end they may write or stamp with ink, in a conspicuous form,clearly and legibly, the statement 'for credit in account of' or other equivalentexpression, followed by the name of the owner. In these cases the check mayonly be instruments for settlements of accounting which do not represent pay-ment in cash.

"The drawee or any person who, notwithstanding the mention 'for creditin account of' followed by the name of the owner, or other equivalent expres-sion put on the check pays it or negotiates it for cash, is responsible for thedamage which said act has caused, without said responsibility exceeding theamount of the check." Id. art. 39.

118 Ley De Cheques No. 2859, art. 37 (1951).119 Id. art. 38.120 Id.121 Id.122 Id.128 Id.

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NON-NEGOTIABLE CHECKS

The Nicaraguan crossed check rules124 were derived from the pro-visions of the former Argentine Code of Commerce. The crossing oftwo lines on the check apparently is not sufficient as a general cross-ing unless the words "not negotiable" also are inserted between theselines, while the special crossing requires "the name of a banker orother determined person, followed or not followed by the words 'notnegotiable.' "125 In accordance with the usual rules, the drawee of agenerally crossed check must pay it to another bank, while thedrawee of a specially crossed check must pay it to a "designated person[or banker] or to another banker duly authorized to make collec-tion.' 128 In order to deposit a specially crossed check, the holdermay specially cross it again to another bank. 2 7 The drawee whopays a crossed check to a non-bank or who pays it to a bank notnamed on the check or one not specially authorized to make collec-tion "shall respond to the drawer for the amount of the check, dam-ages and interest."' 28 This latter clause, which is unique in LatinAmerica, possibly could subject a drawee to extensive damages.

The Ecuadorian Code permits a general crossing to be made by thesimple writing of two lines without the addition of the word "banker,"while the special crossing requires the designation of the particularbanker or bank.1 29 It would appear that the draftsmen of the Codeinadvertently omitted any provision governing the liability of thedrawee who pays a crossed check to a non-bank.

The Chilean provisions resemble the provisions of the Check Lawof the Dominican Republic to some degree, in that two crossed linesalone on the face of the check are sufficient to constitute a generalcrossing, while the insertion of a "name of a determined bank" be-tween these lines will constitute a special crossing. 30 On the otherhand, the Chilean law provides that if the drawee fails to pay a bankin the case of a general crossing or the particular bank in the caseof a special crossing it is "responsible for the consequence.' 1 ' Thisphrase apparently places no ceiling upon the damages which may beassessed against the drawee.

The crossed check rules of the Mexican and Honduran Codes ofCommerce are identical, with the exception that Mexico uses the

124 CODIGO DE COMERCIO DE NIcARAGUA CONCORDADO Y ANOTADO arts. 698-701 (1949).

125 Id. art. 698.126 Id. art. 699.127 Id. art. 700.128 Id. art. 701.129 CoDIGO DE COMERcio art. 494 (1960).130 Ley Sobre Cuentas Correntes Bancarias y Cheques No. 3777, art. 31

(1943) in CoDIGO DE COMERcIO, APENDIcE (1964) (edici6n oficial) (Chile).131 Id. art. 32.

November 19681

phrase "institution of credit" to signify a bank while Honduras usesthe phrase "banking establishment." The presence of two crossedlines on the face of a check is sufficient for a general crossing, whilethe insertion of the name of a particular bank between these linesproduces a special crossing. In both countries, the drawee who paysa non-bank or the wrong bank, "is responsible for the irregularlymade payment."'3 2 Neither country provides for the insertion of thephrase "not negotiable" between the crossed lines.

Tena, the eminent Mexican author, explains the mechanics ofcrossed check payment in Mexico as follows:

Said crossing indicates that the title (titulo-instrument) may onlybe collected by a credit institution, and its purpose is to make pay-ment to illegitimate holders more difficult. In effect, the fact thattwo bankers must necessarily concur for the collection of the check,removes the possibility of collection by a false holder .... Suchprocedure, however, does not cut out all of the risks. It is possiblethat he who has acquired a check by theft may endorse it to a bankfor collection and thusly obtain payment without difficulty. In orderto avert this danger, the English-say Lacour and Bouteron-havethe custom to inscribe on the check the clause "not negotiable."'8 3

In discussing the success of crossed check rules in protecting thedrawer, Tena critically observes:

In our opinion, the danger which we try to eliminate by means ofcrossing, nevertheless subsists in view [of the fact] that not even theclause "not negotiable" impedes the check from being endorsed forcollection as determined in Article 201. The advantage which cross-ing furnished is, therefore, very relative, and perhaps this is due tothe fact that almost nobody uses it [the crossing], this institutionbeing all but unknown in commercial practice.8 4

Mexico and Honduras have virtually the same rule regardingaccount payee checks.135 In discussing the "account payee" check,Tena has stated:

Both the drawer and the holder may prohibit the check from beingpaid in cash, by inserting on it the clause "for credit to account" orother equivalent. Such clause supposes the pre-existence of accounts

132 CODIGO DE COMERciO art. 719 (1950) (Hond.); CODIGO DE COMERCIO

art. 197 (1966) (Mex.).133 F. TENA, TiTuLos DE CaRErro 331 (1956).134 Id. at 331 n.205.135 CODIGO DE COMERciO art. 620 (1950) (Hond.); CODIGO DE COMEacio art.

196 (1966) (Mex.). The wording of both codes is the same except the itali-cized words are omitted in the Honduran version: "The drawer or the holdermay prohibit the check from being paid in cash, by means of the insertion inthe document of the expression 'for credit in account.' In this case, the draweemay only make payment by crediting the amount of the check in the accountwhich it carries or opens in favor of the holder. The check is not negotiablestarting from the insertion of the clause 'for credit in account.' The clause maynot be erased.

"The drawee who pays in another manner, is responsible for the irregu-larly made payment."

THE HASTINGS LAW JOURNAL [Vol. 20

NON-NEGOTIABLE CHECKS

between the parties; for this Article 42 of the Uniform Law forChecks establishes that "the drawee is not obligated to credit thecheck except to a current account" or, as our [Mexico] Article 198states "the drawee only may make payment, by crediting the amountof the check in the account which it bears or opens in favor of theholder." This does not mean that the drawee is obligated to open anaccount: it may refuse to do so, because there may exist undesirablepersons to whom it does not want to deliver a book of checks forfear that they will abuse the same.

As a matter of course the referred to clause is irreconcilible withthe negotiability of the check, and it [the clause] may not be erased.The drawee who pays the check in a different manner is responsiblefor the payment which was irregularly made. 36

In discussing the "account payee" practice, the Argentine writerSatanowsky has stated:

This . . . clause produces effects similar to those used in bankingpractice, to wit: "Not negotiable. For deposit in the account towhom this order is extended" and which originated in the Englishclause: Crossing a/c payee account payee whose meaning is: "Payit for the account of the person designated on the check as being theperson who has a right to payment."

It [the account payee check] does not appear legislated in thelaw of 1882 [the English law] . . . Bouteron points out the effects ofsaid clause, in the sense that it constitutes a warning to bankers thatthis check must only be deposited in the account of the designatedperson, and the non observances of the warning makes him [thebanker] responsible for the consequences of payment, since the bankeris considered as being negligent.137

In conclusion, the provisions of three other countries should benoted. Guatemala apparently does not countenance the crossed checkconcept, but it does provide for the "account payee" check in amanner virtually indistinguishable from the Geneva Check Conven-tion rule.13s El Salvador generally tracks the crossed check rules ofthe Geneva Convention, but adds a provision which appears to haveEnglish antecedents. 39 Probably the tersest articulation of thecrossed check concept in Latin America appears in Brazilian law:

The crossed check, that is a check crossed by two parallel lines, canonly be paid to a bank; and if this crossing contains the name of abank, payment can be made only to this bank140

ConclusionThe objective of the crossed check, account payee and other checks

discussed in this article is to ensure that the proceeds of such an in-strument are received by the payee. The application in the United

136 F. TENA, TITULOS DE CREDrro 332 (1956).137 2 M. SATANowsKY, TRATADO DE DRECHo CoirvmciAL 140-41 (1957).138 CODIGO DE CoImCO art. 794 (1942).139 CODIGO DE COMERcIo art. 456 (1947).140 Lei N. 2.591 de 7 de Agosto de 1912, art. 12, in CoDIGo CoMmacAL

BRAsLnmEmo 338-40 (A. Bevilaqua ed. 1953).

November 1968]

States of negotiability principles to checks fosters the problems pre-sented in the Introduction. The ideal solution to these problemswould be the adoption of a check form which would prohibit thecash payment by the drawee and which would require that paymentbe made only by means of a credit to the account of the payee.

The account payee check implements these aims and, in addition,successfully reduces the risks of wrongful payment. The widespreadadoption of this check form seems doubtful, however, since manypeople do not maintain bank accounts. Because the maintenance ofa bank account is a prerequisite to receipt of payment by the payee ofsuch an instrument, its practicality thereby is severely curtailed.

The enactment of crossed check rules in the United States wouldreduce substantially the problems discussed in the Introduction. Eng-lish experience shows, however, that not all frauds would be pre-vented, since the crossing does not prevent assignment. In addition,the crossed check rules seem unduly complicated, and it is felt thatprotection could be afforded the payee in a less cumbersome manner.

It is submitted that the Italian and Peruvian "non-transferable"checks, which can neither be negotiated nor assigned except to abank for collection, would effectively eliminate most frauds in thesimplest possible manner. Pursuant to these rules, the drawee maypay the check only to a collecting bank or in cash to the payee. Thiswould avoid the problems of receipt of payment for the person whodoes not maintain a checking account. A dishonest employee whoprepares payroll checks for nonexistent employees would be re-quired to furnish identification papers to his confederates in orderto obtain payment in cash or to establish a fraudulent account inorder to have another bank collect the checks. Although either couldbe done, the risk of early discovery would be enhanced. On compari-son with the other available check forms, this instrument would bethe one most easily adaptable to the American financial structure,and therefore the one most likely to facilitate the successful receipt offunds by the party properly entitled to them.

TH-E HASTINGS LAW JOURNAL [Vol. 20

November 1968) NON-NEGOTIABLE CHECKS

Appendix A

C. HANNAFORD, CHEQUES 81 (1923), gives the following illustrationsof generally crossed checks:

See THOMPSON's DICTIONARY OF BAN=IG 196-200 (10th ed. R. W. Jonesed. 1952) for further examples of generally crossed checks.

Appendix B

C. HANNAFoRD, CHEQUEs 81 (1932), gives the following illustrationsof specially crossed checks:

(a) (b) (c)

Ml g. ,!

(a) )() (9) (h)

November 1968] NON-NEGOTIABLE CHECKS

THE HASTINGS LAW JOURNAL

The following example of a "Not Negotiable A/C Payee Only" checkwas supplied by the London branch of the Chase Manhattan Bank:

5678 WADDLE &CO. LIMITEDSecurity Printers

00-12-34

EDINBURGH 9___

ST. STEPHEN'S BANK LIMITEDSILVER 'STREET BRANCH EDINBURGH

Al. PAYTO THE ORDER OF I £.

n'12315n' O0,23I 00,23195'

Appendix CC. HA-NAFORD, CHEQUES 81 (1923), gives the following illustrations

of "account payee" checks:

[Vol. 20

Appendix DThe Paris branch of the Bank of America supplied the followingexample of a generally crossed check:

I 3!&nn~ ztC~~tieatB.P.F_ ___N" 0148162 AZS LasoCTIOH

I Vwd6=9 PARIS FRPANCS

payez h c su

I 1'OrdreI 4I ~' '~'19-

PAYABLE A 'p.'I .PARISj 28, PI.C. W011"m

Appendix E

The Italian branch of the Bank of America furnished the follow-ing example of a "non-transferable" check:

November 1968] NON-NEGOTIABLE CHECKS

THE HASTINGS LAW JOURNAL [Vol. 20

Appendix F

The German branches of the Chase Manhattan Bank and theBank of America furnished the following examples of the Nur zurVerrechnung check:

Sdaec-Nr. Konlo-Nr. Bank-Nr. 4272

0106552 DM

THE CHASE MANHATTAN BANKNalional Associalion

le i, pi,, ZWSIGNIEDERLASSUNG FRANKFURT (MAIN), TAUNUSANLAGE 11

Zahlen Sie gegen diesen Scheck aui fliejnem - unserem Guthaben

Deutsche Mark

Pf wie oben

ancder IUberbringer

(Ausseloer}

FRANKFURTIMAIN 19- NO

BANK FRANTHE CHASE MANHATTAN BANK a u.,K

Nationcl Asocloo 272

AFrankfurt/Main, Germany

r,PY -3 AGAI -

"STRIKE OUT CURRENCY NOT APPLtCA5L B

SPECIMENSIGNATURE

an

v -

oder Oberbringer

THE HASTINGS LAW7 JOUR NAL [Vol. 20

November 19681 NON-NEGOTIABLE CHECKS

Abso:

Rechnung yom . ........................... DM .............................

abi0glilc ....................... % Skonto DM .....................

DM .............................

Ss.-p * 154827 B...N. 36 273

Konto. NICHT UBER DM 3000r.M ...........................

39ank of AintirimaRATIONAL- A'~qs'9 ASSOCIATIONFILIALE OOSsELOoRP

4 DOSSELDORF 1

KONI6SALLEE 33

Zablen Ste gegen dle, ;c aus melnem/unseremGuthaban

Deutsuhe M cij e ..o .. ..................................................

......... . ........ Pf wie obena.den Nebengenannten oder Uberbrlnger

. ................. d .en ......................... 19 .....rAwstellungsort)

SB (Aussteller)S6.: s I wtoel dswZmdzj t Ubbmftdgeedd IWt, wete rJ&I bImL

No 5j~be *hai ZdhWC*d &Af diM Sdu& Pi cis W&d geSUceAe.

.. ......... ..°....,

Raum

for

Frelmachung

POSTKARTE

...................... ........... C;.... .....................

In explaining the idea of a postcard check, Mr. Joseph H. Kohl, As-sistant Manager of the Dusseldorf branch of the Bank of America,stated to the author that: "You will note that . . . [this] check isprinted in the form of a postcard; it is very popular in Germany. Be-cause of the risks involved, they are limited to an amount of DM3,000each (about $750). In addition, they are always imprinted with therestrictive remark 'Nur zur Verrechnung.' Our normal checks do notshow this restriction, but the drawer may add this remark to anycheck if he wants to (rubber stamps are readily available for thispurpose at each stationery shop)." Letter from Mr. Joseph H. Kohl,Assistant Manager of the Dusseldorf branch of Bank of America, tothe author, Dec. 15, 1967, on file in Hastings Law Library.